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European stocks fall after record Wall Street run

US stocks had carved out best rally since 1930s, but momentum has faded

European stocks fell on Friday, undermining a record rally in US stocks the previous day, reflecting persistent strain from the economic impact of the coronavirus pandemic.

London’s FTSE 100 fell 4.5 per cent in late-morning trading, snapping three days of gains that had seen the index rise more than 10 per cent this week. Stock markets dropped across Europe, leaving the Stoxx 600 index of the region’s largest companies down 3.5 per cent.

The pullback followed rises in Asia and Wall Street’s best three-day run since the 1930s. The MSCI All-World index of global stock markets is on course for one of its best weeks on record following the run of gains.

Market support this week stemmed from a $2tn stimulus deal in the US that “alleviated the panic”, said Johanna Chua, an emerging Asia strategist at Citi. But she said the rally in US markets on Thursday was unconvincing, given the dire economic background and growing rates of infection.

“Many market participants view this ‘squeeze up’ in the markets as a bear market rally,” she said.

Futures pointed to opening losses of more than 2.5 per cent for the S&P 500 later in the session.

“The first phase of the market correction has been completed as we learn how to cope with the virus,” said Johanna Kyrklund, chief investment officer at Schroders in London. “The next phase [of the sell-off] will be about processing the economic consequences,” Ms Kyrklund added.

The first phase of the market correction has been completed as we learn how to cope with the virus
Johanna Kyrklund, Schroders

Investors’ attention will now turn to the impact of lockdowns of billions of people across Asia, Europe and the US and large-scale industrial shutdowns.

Strategists said that there could be more pain to come following a violent sell-off over the past few weeks that prompted big investors to liquidate riskier holdings in favour of cash.

The economic cost of the coronavirus pandemic is starting to become apparent, particularly in the US, which overtook China this week to become the country with the highest number of infections.
US data on Thursday revealed jobless claims surged to a record 3.3m in the week ending March 21, as people suddenly short of income turned to the government for help.

“Policy responses need to be big, bold and fast to keep companies alive until the health crisis fades, or otherwise there’ll be permanent damage to economies that will take years to recover from,” Nomura’s global markets strategists wrote in a note to clients.

Sentiment had been buoyant in Asia, however. Japan’s Topix stock index closed 3 per cent higher, taking its gains for the week to over 10 per cent. South Korea’s Kospi edged up 1.9 per cent while China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks added 0.3 per cent. Australia’s S&P/ASX 200 closed down 5.3 per cent, erasing earlier gains.

Figures on Friday showed China’s industrial profits plunged nearly 40 per cent year on year in February — a drop of almost $60bn — while South Korean consumer sentiment fell to its lowest since 2009.

Analysts at ANZ forecast Asia’s gross domestic product growth could slow to 3.3 per cent this year, compared with more than 5 per cent in 2019. The economic damage could be even worse than feared, depending on how long the pandemic lasts, the analysts said.

Haven assets also rose on Friday. Japan’s yen strengthened 0.9 per cent to ¥108.60 per dollar, while the 10-year US Treasury yield fell 0.055 percentage points to 0.7535 per cent. Yields fall as bond prices rise.

“Despite some relief in equity markets over the week, the picture for the global economy and markets still looks bleak,” said Daniel Been, a strategist at ANZ in Sydney.

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